The Right Way To Unwind Your Locked-In Retirement Account

The article “The Right Way To Unwind Your Locked-In Retirement Account” was originally published on MoneySense on July 10, 2018.

OM is trying to formulate a plan for a locked-in retirement account. What are some LIRA best practices to consider?

Q: I am at the age where I can transfer my LIRA into a LIF. What I am thinking of doing is to make a partial transfer except I am not sure that is allowed.

For example, assume that my LIRA is $10,000 consisting of 10 dividend paying stocks. Can I move five of those dividend paying stocks into a LIF account and keep the other five in the LIRA?

Dividends in the LIF would be enough to cover the minimum withdrawals from the LIF and would delay the need to sell investment and pull out capital.

Can you partially transfer from a LIRA to a LIF?

—OM

A: Thanks for your question, OM. I’ll answer it and elaborate a bit on locked-in account best practices.

Generally, a locked-in retirement account (LIRA) can be converted to a life income fund (LIF) at age 55, but it all depends on the pension from which the funds originated. If the terms of the pension plan allow pensioners to receive benefits prior to age 55, you may be able to convert a LIRA earlier.

The latest age at which you must convert a LIRA to a LIF is by December 31 of the year you turn 71.

Of course, once you convert a LIRA to a LIF, you must begin withdrawals the subsequent year, OM. Withdrawals are mandated by government minimum withdrawal rates based on your age, just like Registered Retirement Income Funds (RRIFs) that originate from Registered Retirement Savings Plans (RRSPs). However, LIFs also have maximum withdrawal rates as well, which vary depending on whether the pension plan was from a federally regulated employer or, if from a provincially regulated one, from which province.

Although uncommon, you can convert only a portion of your LIRA to a LIF if you would like to do so. That means the minimum and maximum withdrawal rates would apply to the LIF balance only, which would be less than if you converted your entire locked-in account balance (so, the LIRA would be excluded).

This partial conversion may make sense if you only want or need a certain level of income from your LIF and want to continue to defer some of your LIRA income to the future.

You can generally transfer investments in kind from a LIRA to a LIF so that some of the investments move over as is to your new LIF account. This would save transaction costs to sell and repurchase and would also ensure your nest egg stays invested during the transfer process (so that you’re not “out of the market” for some period of time).

Typically, people convert their entire LIRA to a LIF, the holdings all stay intact and the only things that change are their account number and the withdrawal requirement.

I’ll caution you, OM, not to get too preoccupied with not pulling out capital from your account. The minimum withdrawal percentage for a LIF rises from 2.86% at 55 to 4% by 65 and 5% by 70. By age 80, you must take at least 6.82%. If you’re trying to manage your LIF account to provide an income that exceeds the withdrawal rate, you may get too preoccupied with dividends to the detriment of proper portfolio management.

Besides that, you may be dipping into your registered account capital, while maxing out your TFSA and maintaining a non-registered account, such that your overall capital is maintained across your whole portfolio. Sometimes it makes sense to draw down one account quicker than others as part of your retirement planning for decumulation.

And even if you are dipping into your capital each year, OM, so long as your portfolio, pension income and other retirement assets are sufficient to fund your lifestyle well into your 90s, remember, the whole reason you saved that money was to stop working someday after all.

Another consideration for your LIF account is that depending on the province where your pension plan arose, you may be able to unlock some or all of your account. Different provinces allow for unlocking of up to 50% of an account upon conversion to a LIF, or up to 100% if the balance is low enough or if you have extenuating circumstances like a shortened life expectancy. Unlocking in some cases can be beneficial so you can consolidate a LIF account with a RRIF account, rather than maintaining them separately.

Hopefully this helps, OM. Good luck with your LIRA conversion.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.